Q3 improvement from its Q2 lossTORONTO, Oct 6 (Reuters) - Despite a recent rally in stock prices and C$2 billion in debt issuance, insurer Manulife Financial is still skating close to its threshold capital levels, and could take action to shore up its balance sheet.
While the danger of a dilutive capital raise or an asset sale has likely receded in the past month, the company remains vulnerable to a drop in stock markets, and analysts aren't ready yet to say that Canada's largest insurer is out of the woods.
Indeed, Manulife is widely expected to post a second-straight quarterly loss of more than C$1 billion ($990 million) when it reports results next month. The insurer has been hurt by its large exposure to both equity and debt markets, which stems in part from its past sales of guaranteed investment products.
"With the equity markets being up in the quarter, it certainly was a positive. Having said that, interest rates were down," said Robert Sedran, an analyst at CIBC World Markets, who expects Manulife to post a loss of C$1.6 billion in the third quarter.
That would represent an improvement from its second-quarter loss of C$2.4 billion, with the difference due in part to a 9.5 percent rally by stock markets in the July-September period.
But while the earnings picture may improve somewhat, many will focus on Manulife's minimum continuing capital and surplus requirements (MCCSR) ratio, the industry's main measure of capital health.
Manulife's ratio was 221 percent last quarter, which is above regulatory targets of 150 percent and even above its main Canadian competitors. Manulife tries to keep it high to protect itself against volatile markets.
"While they do carry this excess capital, the fluctuations are far more volatile than they are for its peers," said Craig Fehr, an analyst at Edward Jones in St. Louis, Missouri.
Analysts believe that a level of 200 percent would be the bare minimum comfort level for the insurer, and some expect the ratio could creep down this quarter, due to the continued decline of bond yields, as well as charges and writedowns the company has said it will record.
Andre-Philippe Hardy of RBC Capital Markets expects Manulife's ratio to be in a range of 210-215 percent, while CIBC's Sedran expects it to be about even with last quarter.
Sedran's estimate assumes that Manulife uses C$2 billion in debt that it issued during the quarter to shore up its capital position.
EQUITY ISSUE?
Manulife CEO Donald Guloien said in August that if the ratio fell too far, the company would consider issuing equity or selling business units.
"I think what would prompt a common equity raise would be a combination of another big sharp downturn in equity markets, an unfavorable movement in interest rates and them tapping out other resources," said Fehr.
Gavin Graham, president of Gavin Graham Investments in Toronto, noted that Manulife issued equity last fall when it was in need of funds, but he said such a move would be less likely now because of the company's weak share price.
The stock, which closed at C$12.71 on the Toronto Stock Exchange on Wednesday, has fallen 43 percent in the past year.
"Why on earth would you want to sell equity when the price is as low as it is?" Graham said.
He said that while an asset sale would be a possibility -- likely from Manulife's extensive and valuable Asian operations -- another option is an acquisition, which could be capital positive if the company used some of its equity as currency.
Manulife has been rumored to be interested in Asian assets that other insurers are trying to divest, and has a past history of being aggressive on the acquisition front, most notably in its $11 billion purchase of John Hancock Financial in 2004.
"They're more likely to be a buyer than a seller," said Graham.